YouTube tries e-commerce

Eden Zoller/Ovum
15 Oct 2008

Google-owned YouTube is tapping into e-commerce revenues with the launch of a new service in the US that allows viewers to buy music and games from selected partners featured on YouTube videos. This is a good move as Google has struggled to monetize YouTube despite experiments with a range of advertising models.

YouTube is the dominant player for online video and is a hugely popular user-generated content site enhanced with social networking features. It had 330 million visitors in August 2008, according to Comscore.

The problem is that while YouTube continues to show strong growth in usage and users, it is struggling to find a strong, underpinning business model to match. And this is a big problem when you consider that Google spent $1.65 billion to acquire YouTube (2006) and has been investing in it ever since.

Google does not provide financials for YouTube but it is not yet profitable and its contribution to company revenue is minimal . Google's second-quarter 2008 revenues stood at $5.37 billion; YouTube revenues are estimated to come in at around $100 million for full-year 2008.

Google has taken pains to find advertising formats that sit comfortably on YouTube, and to be fair this is particularly challenging in the context of user-generated video content.

Social networks are attractive to advertisers because of the opportunities for deeper targeting and interactivity, but embedding advertising in a way that sits comfortably with users and does not backfire on brands is very difficult.

Advertising revenues in this context are not the sure thing that many in the industry have presumed. It seems that Google agrees and recognizes the need to look more seriously at diversifying revenues beyond advertising.

It has chosen an e-commerce platform to do this. This makes sense as e-commerce is a natural complement to online advertising and ideally a "click to buy" is what the advertising should encourage.

We think Google has made the right move and we have advocated mixed revenue streams for social networks as a means to strengthen the business model. This is the approach adopted by LinkedIn, one of the few social networks that has managed to break even. Advertising will be the mainstay, but smart companies will look at a more diversified model.

The YouTube e-commerce platform is based on a simple concept, which in our book is always a good thing.

YouTube viewers who want to buy, for example, a song featured in a music video can click on an icon that takes them to selected commerce partners including and Apple's iTunes store. YouTube gets a share of the revenues from every transaction.

The current content partner line-up is modest in terms of numbers if not names, and comprises content from EMI and Universal Music Group, and EA's Spore video game.

Google is of course hoping to bring other content partners on board going forward and also diversify the content and services on offer. Another attractive aspect to the proposition is that YouTube is creating an environment where viewers pay for third-party content rather than pirate it and infringe copyrights.

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